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Yen Pins Rebound Hopes on Soft US Data, Europe Jitters

The Japanese Yen looks to risk aversion following soft US ISM data and returning European stability fears to fuel a rebound but S&P 500 futures argue otherwise.

Talking Points

Euro Unlikely to Find Lasting Strength in PMIs on Swelling Political Risk

Yen Pins Rebound Hopes on Soft ISM, S&P 500 Futures Argue Otherwise

Australian Dollar Fell in Asia as RBA Signaled Further Rate Cuts Ahead

The final roundup ofJanuary’s Eurozone PMIdata is in focus on the economic calendar. The cumulative Composite gauge is expected to be confirmed at the preliminary estimate reading of 48.2, the highest in 10 months (although still below the 50 “boom-bust” level). The result suggests the pace of contraction in manufacturing- and service-sector activity is ebbing, presumably pointing to stabilizing growth and paving the way for an eventual recovery.

Absent a sharp upside surprise however, that much alone is unlikely to much support to the Euro. Indeed, traders have had ample opportunity to price in the cautious improvement in economic news-flow out of the currency bloc over recent months. Meanwhile, sovereign risk fears appear to be re-emerging as Italy gears up for elections later this month while Spanish Premier Mariano Rajoy faces calls for his resignation amid corruption accusations. Investors fret that a political shake-up in either or both countries will compromise deficit-reduction efforts there.

The US ISM Non-Manufacturing Composite reading comes into focus later in the day. Economists’ forecasts call for decline to 55.0 in January, implying growth in service-sector activity slowed. The result may amplify concerns about the ability of the world’s largest economy to withstand the likely onset of additional austerity ahead of the “sequester” spending cuts trigger deadline at month-end. With that said, S&P 500 futures are pointing higher, arguing for a recovery in sentiment after yesterday’s selloff. In the FX space, this would imply renewed downward pressure on the Japanese Yen.

The Australian Dollar underperformed in overnight trade after the RBA signaled it was preparing to cut interest rates in the months ahead. The central bank opted to keep the benchmark lending rate at 3 percent as expected this time around but Governor Glenn Stevens said the “inflation outlook… afford[s] scope to ease policy further” in the statement accompanying the announcement. The Yen rose on safe-haven inflows as Asian stocks declined, reacting to the pickup in Eurozone stability jitters that re-emerged over the preceding 24 hours.

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